On September 2, 1974, President Gerald R. Ford signed the Employee Retirement Income Security Act (ERISA) into law, and created the Pension Benefits Guaranty Corporation (PBGC), a “government-sponsored insurer of private pension plans,” to protect the pensions of workers. When participating companies declare bankruptcy or face other pension-related problems, PBGC races to the rescue and guarantees employees will continue to receive a pension. PBGC covers retirees who receive “defined” or “fixed” benefits. Under this pension scheme, retirees are paid a monthly payout based on their salary and years of service to a company. PBGC offers two types of pension insurance: (1) a single-employer program that includes some 35 million working and retired people enrolled in nearly 30,000 pension plans and (2) a multi-employer program which includes almost 10 million working and retired people enrolled in more than 1,500 pension plans. It pays more than 500,000 retired people in nearly 3,500 terminated pension funds. PBGC generates revenues from several sources: insurance premiums paid by participating employers, its investments, and when it absorbs failing pension plans. In recent years, the airline industry has caused PBGC to work overtime. Some airline companies have inadequately funded their pension plans and they are unable to continue paying pensions to their retirees. For example, when Pan Am went bankrupt some 15 years ago and many employees who worked at the company for 20 to 30 years lost their pensions, PBGC came to the rescue and bailed out Pan Am’s pension program. More recently, two major airlines, US Airways and United Airlines, have fallen into serious financial troubled times. In 2003, PBGC took over US Airways’ pilots’ pension obligations. In December 2004, PBGC took over United Airlines pilots’ pension program to the tune of about $1.4 billion. In 2005, PBGC took over US Airways’ flight attendants and mechanics’ pension plan. All told, the bailouts of these two airlines cost PBGC approximately $4 billion and have placed a tremendous financial strain on the government-sponsored agency’s resources. Recent financial analyses of Delta Airlines suggest that it too may be headed down the same path as US Airways and United Airlines. According to the Center on Federal Financial Institution (CFFI), a nonprofit Washington, DC, policy institute, all is not well at PBGC. This nonpartisan organization has raised serious concerns about the financial health of PBGC, and its continued ability to bail out failing pension plans. In 2003, PBGC had an $11 billion deficit, which more than doubled in 2004 to $23 billion. The agency’s current and future financial obligations to pensioners are projected to include more than 1 million retired people. Moreover, one projection by CFFI suggests that PBGC may not have enough money to support payments to pensioners in 15 years. Such gloomy projections caused Elaine Chao, the U.S. Secretary of Labor, in January 2005, to develop a plan so that the government-sponsored agency can survive. Perhaps it is time for companies to change defined benefits pension plans in favor of other plans, such as a defined contribution plans that provide benefits based on employee and employer contributions rather than a monthly guarantee.

QUESTIONS 

1. As a future full-time employee, would you prefer a defined pension benefit or a defined contribution plan? Why? 

2. Pension benefits are costly, yet workers need them desperately. Are there any ways managers can ensure employee pension plans are protected?

3. When a company goes bankrupt, should the federal government bail out pension funds? Why? Why not?